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Musk’s Private SpaceX Market Hints at Path to Tesla Buyout

(Bloomberg) -- Elon Musk, a pioneer in commercial space exploration and electric cars, is now tinkering with one of Wall Street’s most storied products: the management led buyout.

Musk, in tweeting Tuesday that he may take Tesla Inc. private, said he hoped “all” investors would remain shareholders after the buyout rather than follow the conventional approach of cashing out. He looked no further than his rocket company -- Space Exploration Technologies Corp. -- for a way to keep Tesla shareholders onboard.

For years SpaceX has run an internal stock market for employees and other shareholders, allowing it to remain closely held. They can privately sell shares to sophisticated investors such as Fidelity Investments through liquidity events, according to a letter from Musk to employees. Tesla could use a similar structure to go private without requiring stockholders to cash out, said Sohail Prasad, founder of San Francisco-based Equidate, which helps closely held tech firms hold similar share sales.

In an email to Tesla employees on Tuesday, Musk said the structure envisioned for Tesla is similar in many ways to the SpaceX structure: external shareholders and employee shareholders have an opportunity to sell or buy approximately every six months.

Institutions negotiate a set price for the stock with SpaceX based on criteria such as the rocket company’s financial performance and market conditions, Prasad said.

Shares of SpaceX in the private market have risen in value in the past few years -- from about $77 a share in 2015 to $169 as of April, according to SharesPost. Tesla and SpaceX did not respond to a request for comment.

Incentive To Hold

Fidelity has disclosed in regulatory filings that some of its mutual funds, including the Fidelity Growth Company Fund, acquired SpaceX shares through private placements beginning in January 2015. A spokeswoman for Fidelity, which invests in shares of other private companies including Uber Technologies Inc., Lyft Inc. and Airbnb Inc. through its mutual funds, declined to comment Tuesday.

While Musk is offering to buy investors out at $420 a share, he is also encouraging them to hold onto their stock. Putting in place the structure employed by SpaceX would provide investors with an avenue to sell their stock in the future should Tesla go private by removing its shares from trading on the Nasdaq Stock Market, Prasad said.

In turn, an internal Tesla market could encourage smaller investors to hold onto their stock, lowering the amount of money, which could be tens of billions, that Musk must raise for the buyout.

“If you are a believer in Elon, I would continue to hold onto those shares,” said Michael Jurasic, a securities attorney at Ropes & Gray, who added that it’s unclear exactly how Tesla’s buyout would work. Once Tesla is private, Jurasic said, “I don’t see any way you could get back in as your typical retail investor.”

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As a private company, Tesla would only be able to sell new shares to institutions and individuals who have annual income of at least $200,000 or a minimum net worth of $1 million, not including their primary residence. But federal securities laws do allow smaller investors to retain stakes in public companies that decide to go private, said Erik Weingold, an attorney who specializes in private placements. States also have provisions that permit existing investors in a private company to continue buying its shares, even if they don’t meet the income or net worth thresholds, Weingold said.

Tesla has many mom-and-pop investors. Its shareholders of record -- the term for people who hold stock under their own name -- totaled 1,156 at the end of January, more than double the 511 at General Motors Co., according to regulatory filings. And that doesn’t include Tesla shareholders who hold their stock under the name of their bank or brokerage, a figure that is “substantially greater” than the one for shareholders of record, Tesla filings say.

No More Shorts

If Musk, Tesla’s chairman, follows a route similar to SpaceX, he would have more say over the price of the electric-car maker’s stock and greater ability to determine who its stockholders are. And because shares would no longer be traded on an exchange, short sellers would be shut out.

“They can set the price and where the shares are going,” said Justin Byers, chief data officer for the Prime Unicorn Index, which tracks the performance of 102 private U.S. companies valued at $500 million or more.

Musk’s tweets about how Tesla could structure the deal has left $370 billion asset manager Janus Henderson Group Plc perplexed.

“I don’t really understand the idea of what was suggested in the potential for them to go private,” Dick Weil, Janus Henderson’s chief executive, said Thursday in an interview with Bloomberg Television. “I, like a great many others, am confused by what is motivating” the go-private plan and “why it was communicated in the way it was. I just can’t interpret it. It doesn’t make sense to me.”

Another route Musk could take would be to “go dark” by delisting Tesla and reducing the number of shareholders below the threshold that requires Securities and Exchange Commission registration and reporting. Tesla could seek SEC approval to make a tender offer solely to its small shareholders while retaining larger institutional owners, John Coffee, a professor of law at Columbia University, said in an interview.

If Tesla goes private, there will be some shareholders who aren’t happy because of the loss of liquidity compared with that of stock traded daily on a exchange like the Nasdaq Stock Market, Coffee said.

Once private, Tesla would have to continue filing public financial reports with the SEC if it has more than 300 shareholders. But for Musk, that may be a small price to pay in return for greater control over Tesla’s stock.

“He may be okay if the world knows his profit and loss, as long as he doesn’t have to deal with the short-sellers and the wild fluctuations in his stock,” said Jurasic.